Study: Consumers unknowingly agree to overdraft protection fees

Consumers remain confused about overdraft protection and the fees they generate, with better than half of them unknowingly opting into expensive coverage and a third of them not finding out until the charges started wracking up, according to a new study.

“It all shows a great deal of customer confusion over how the programs work,” she said.
An overdraft penalty is incurred when a banking customer has insufficient funds to cover a payment transaction — either by a check or a debit card — and is charged a fee for the short-term advance the bank makes to pay it.

Even though three-out-of-four people in the survey said they’d prefer to have a transaction declined rather than incur the fee, 54 percent of the 6,043 respondents said they have had at least two overdrafts. Fourteen percent said they’d overdrafted as many as 10 times.

“We want consumers to be responsible, but they should not have to be confused about what they’re opting into or not,” Weinstock said.

Banks say it’s a valued service for their customers and are careful to ensure they understand how it works.

“Banks market overdraft protection as a consumer benefit and warn customers that if they don’t opt in for the protection, they will need to have sufficient funds in their account to cover all transactions, or those transactions will be denied,” said Caroline Joy, spokeswoman for the Colorado Bankers Association.

Pew says the number of consumers who say they didn’t realize they’d opted in for coverage — the result of banking reforms the Federal Reserve put into place in 2010 — indicates the program and its varieties remain unclear. Overdraft fees first became an issue in 2009.

“There must be more clarity and transparency,” Weinstock said.

There are three basic options: no fee and the overdraft is refused; transferring money from an associated account, such as savings or a line of credit, to cover the overdraft, typically at a cost of about $10; allowing the bank to cover the overdraft for a fee that averages $35.

The benefit, according to bankers, is consumers avoid being embarrassed at the checkout line if a purchase is refused.

“It’s a matter of choosing the service for a small fee (opting in) or choosing to go without (opting out) and running the risk of embarrassment of declined transactions and cost of returned check charges,” Joy said.

Banks are required to tell customers they have a choice and what each one means to them.

“Often the overdraft penalty is referred to as a ‘standard’ one, with little explanation about the transfer option,” Weinstock said.

What’s more, of those consumers in the study who said they incurred an overdraft fee, a quarter of them said they did not repay the overdraft quickly enough to avoid additional penalties.

It works like this: Assuming a $100 balance, the customer writes three checks that arrive to the bank in this order — $45, $25, $65 — and had two debit card transctions, one of $10 and the next at $20, both of which occurred just before the $65 check came to the bank.

If taken in order, the customer should have just one overdraft fee if the first four transactions are run in the order received by the bank ($45 + $25 + $10 + $20 = $100) and the $65 check is negotiated last.

But when reordered in highest-to-lowest fashion ($65, $45, $25, $20, $10), the customer faces overdraft fees from the second transaction ($45 would put the account over the $100 balance) and would incur four separate overdraft charges.

“This survey is very clear that this practice should stop,” Weinstock said.

Emilie Rusch covers retail and commercial real estate for The Post. A Wisconsin native and Mizzou graduate, she moved to Colorado in 2012. Before that, she worked at a small daily newspaper in South Dakota. It's the one with Mount Rushmore.